Consulting, hardware purchases flat in 2007

IT budgets are expected to increase 4-6% in 2007, according to industry experts. The focus of next year's budgets will be more on software and less on consulting and hardware spending.

Is your organization feeling a little cautious about IT spending in 2007? Then you're in good company. Growth in IT budgets is expected to slow somewhat in 2007, say analysts who estimate budget increases to range from 4% to 6%.

Andrew Bartels, vice president of Forrester Research Inc. in Cambridge, Mass., said one reason is an expected slowdown in the U.S. economy, as well as the end of the hardware upgrade buying spree that consumed IT funds in 2004, 2005 and early 2006.

Hardware expenditures down

"Much of the surge of investment in 2004 and 2005 was restocking of old equipment, servers and routers" bought before 2001, he explained. Therefore hardware expenditures will likely slow in 2007, as will IT consulting services, as many large infrastructure projects wind down.

"Whenever there's a downturn in corporate revenues, the CIO tends to send the consultants packing," Bartels said.

Spending shifts from hardware to software

Stephen Minton, vice president of worldwide IT markets and strategies at IDC in Framingham, Mass., agreed that hardware infrastructure purchases are likely to be flatter.

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"The last two years, companies focused on replacing and upgrading PCs, servers, storage and network equipment. Those dollars are now shifting from hardware to software, such as business intelligence and storage software," Minton noted.

Norbert Kubilus, CIO of Las Vegas-based Sunterra Corp., said he plans to allocate less for his consulting expenses and hardware in 2007.

"We've used consultants more as a safety valve for projects. But next year we plan to cut our dependency on them," he said, noting that the general theme for 2007 is "do more with less."

Hardware costs will be lower, thanks largely to a migration last year from Sun Microsystems Inc.'s Solaris servers to Linux clusters. The use of the open source Linux platform reduced software license costs and the clustering will reduce the need for more hardware.

"We're getting better performance from fewer nodes," Kubilus said. "We're looking at an 80% savings in maintenance."

Business optimization tools remain popular

Overall, outsourcing services and business software will fare best in next year's IT budgets. But it's not going to be any spending fest, warn analysts. Instead, companies will incrementally add new functions and upgrades to existing applications.

"Companies are doing things in a much more modular way than in the past," Minton noted. "They're bolting on to existing infrastructures. ERP and database software is going through a reasonably strong upgrade cycle."

Organizations will be focusing particularly on software that helps them cut costs or improve processes.

"Companies are looking to business intelligence and analytics, procurement and sourcing applications. They're looking at products that can help improve profits," Bartels said.

Barry Kadets, CIO of Gemline, a Lawrence, Mass.-based promotional product maker, says his company's budget increase is still undecided -- putting it anywhere from 3 to 10% -- but the emphasis will be on "adding efficiencies to reduce costs."

Besides completing an upgrade of the ERP system, which it began last year, Gemline will be updating its storage area network as well as purchasing additional business intelligence (BI) software.

Disaster recovery and high availability will also be on Gemline's shopping list for 2007. He plans to invest in continuous data protection software and to look for a disaster recovery service provider.

Most companies, however, won't be investing greatly in disaster recovery, said Thomas Pisello, CEO of Alinean Inc., an Orlando, Fla.-based IT and business consulting firm specializing in ROI analysis. "Companies are conscious of the potential risks, but [disaster recovery] isn't a focus because it doesn't generate revenue."

Technologies that will be hot in 2007, Pisello said, include BI, services oriented architecture tools, integration tools, collaboration software and security technologies such as policy management.

Innovation spending needs to increase

Organizations are not spending as much as they should on innovation, due to the high costs of routine operations and maintenance. Only 10% of the average IT budget goes toward innovation such as automating processes or investing in entirely new applications, whereas 20% is what many CIOs would prefer to see.

"The companies that will be tops this year will be looking at how they can allocate more and more of their money away from keeping the lights on and more toward innovation to help revolutionize the business," he predicted.

Sue Hildreth is a contributing writer and editor based in Waltham, Mass.

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